The Effect of Business Strategy on Organizational Performance of Small-Medium Scale Enterprises in the Manufacturing Sector of Ghana

Scientific Essay, 2014

10 Pages



1.0 Introduction
1.1 Theoretical Framework and Hypothesis

2.0 Literature Review
2.1 Defining strategy
2.2 Generic Competitive Strategies and SMEs in Ghana.
2.3 Strategy and Performance of SMES

3.0 Methodology

4.0 Results and Discussion

5.0 Conclusion and Recommendation

6.0 Limitation and Implications for Future Research



This study examined the impact of business strategy on the organizational performance of Small-Medium Scale Enterprises (SMEs) in the manufacturing sector of Ghana. Whereas some SMEs are aware of the extent to which strategy can impact on their businesses, not much has been studied to identify the specific strategies which can be used to improve the performance of the SMEs. The study made use of questionnaires which were adminstered to 100 respondents who were randomly drawn from 10 SMEs. The performance indices were derived from a time series data from 2008 to 2013 on sales, profits before tax and labour size. Regression and analysis of variance (ANOVA) were run to examine the relationship between strategy and organizational performance. It was found that, business strategy statistically and significantly impacted on organizational. Again, cost leadership significantly influenced organizational behaviour (p="<"/i>.000<.01) but differentiation and focus strategies did not. The study recommends that the SMEs should strategic enough and also take advantage of cost leadership to enhance growth and induce greater organizational performance.

Keywords: Business Strategy, Performance, Small/Medium Scale Enterprises

1.0 Introduction

The effect of business strategy on organizational performance is a subject of great significance, in the face of increasing globalization and intense market competition. As Gibus and Kemp (2003) put it, strategy plays a crucial role in the peformance of a firm because it helps to define the direction along which a firm intends to move and how the firm is going to get there. Thus, a firm's performance is also dependent on its business strategy and how effectively the strategy is implemented by the firm (Olson and Bokor, 1995). Chandler (1962) has noted that SMEs are supposed to adopt different types of strategies in order to make it easier to measure organizational performance rather than relying on a single strategy applied over a long-term. Small and Medium-size Enterprises (SMEs) thus, are to strategically pursue their vision in order to sustain their businesses, and to become more innovative and competitive both locally and internationally (Porter 1996).

It needs also to be emphasized that, when it comes to strategy formulation, the business owner or manager plays an important role (Philipsen and Kemp, 2003). The owner/manager’s competitive development and personal goals therefore can help determine the understanding and use of strategic management and planning (Postma and Zwart, 2001). A meta-analysis of existing studies by Schwenk and Shrader (1993) have indicated a positive linkage between strategy and growth. Porter (1991) has also observed that strategy leads to superior and sustainable performance. As a result, when a company develops and implements effective long-term strategies, it could impact on the competitive positioning of that company on the market.

Although the SMEs in the manufacturing sector of Ghana contribute meaninfully to the socio-economic development of the country, the sector is dominated by sole-proprieters whose business practices are a matter of grave concern (Acquaah, 2011). There is a high tendency on their part to make decisions without any broad consultations, relying greatly on their personal inclinations rather than sound strategice management practices Amoako-Gyampah and Acquaah (2008). This situation does not help the businesses to perform as expected, in some cases. Besides, most SMEs are busily engulfed with operational problems, which prevent them from devoting adequate time to quality strategic management issues. Thus, the business owners and managers place very little value on formal planning, strategic thinking and a developing long-term vision (Pelham, 2000).

Based on these postulations, this study examines the extent to which strategy impact on the performance of SMEs in the manufacturing sector of Ghana. Although much has been written on SMEs in Ghana, very little of the literature focuses on the specific business strategies which the SMEs can adopt to improve upon their business performance (Hanlon and Scott, 1993, and Pelham, 2000). However, recent studies by Acquaah and Ardekani (2008) tend to suggest that some organizaions find the use of differentiation stategy quite profitable, in view of their over-reliance on imported goods which are normally cheaper than home-made ones, irrespective of product quality. The authors however note further that, over 50% of the firms examined use strategies which are akin to cost leadership. This, according to Barney (1990), allows them to offer products and services with features which are acceptable to many customer preferences. It thus therefore appears that most of the strategies used by the SMEs are of the generic competitive type, as espounded by Porter (1985). This study is therefore significant in the sense that it addresses the effects of the generic competitive strategies on the performance of Ghanaian SMEs in the manufacturing sector.

1.1 Theoretical Framework and Hypothesis

The performance of an organization is dependent on the busines strategy adopted and implemented (Kotey and Meredith, 1997). Findings by a number of researchers have also established relationships between business strategy and organizational performance (Covin and Slevin, 1986; Delmar, Davidsson, and Gartner, 2003; Yasuda, 2005). Miller and Friesen (1983) contend that the most performing organizations are those whose strategies tend to initiate action through innovation in areas such as product development and customer service, instead of imitating what other organizations are already doing on the market. Zeithmal and Fry (1984) also specify some of the performance indicators as improvement in current products to meet changing customer taste, needs and requirements, product development with emphases on product quality, increase in market and subsequently, financial performance. A study by Vickery, Droge and Markeland (1993) also discovered that high performing firms implement new production technologies, emphasize cost effectiveness, are mindful of labour productivity are keen to compete within the industry. Based on the literature, the hypotheses for business strategy and performance were formulated as follows:

1. H0 = Business strategy impacts on the performance of SMEs in the manufacturing sector of Ghana.

H1 = Business strategy does not impact on the performance of SMEs in the manufacturing sector of Ghana.

In relation to competition, the generic competitive strategies of Porter (1985) are worth considering, in view of their dominance in the theory of competition (Dess, Lumpkin and McGee, 1999). As Teach and Schwartz (2000) point out, Porter’s work is not representative of the entire strategy field, but it covers a major part of it.

According to generic competitive strategies theory, competitive advantage is the bedrock of a sustainable above-average performance in the long run. In the words of Hax and Maljuf (1991), there are two basic forms of competitive advantage which a firm can exploit, namely: low cost and differentiation advantage. When these two types of competitive advantage are combined with a firm's scope of activities, they generate three generic strategies, which are cost leadership, differentiation and focus (Porter, 1985). However, each of the generic strategies takes a different route to achieving competitive advantage (Dess, Lumpkin and McGee, 1999). For example, whereas the cost leadership and differentiation strategies focus on achieving competitive advantage in a broad range of segments, focus strategy on the other hand, does so in a narrow segment. However, the specific actions which can be taken to implement each generic strategy differ widely from industry to industry (Hax and Maljuf (1991). Due to the influence of which each of the strategies can have on the peformance of an organization, as far as competitive advantage is concerned, the following hypotheses were formulated for the study:

2. H0 = Cost leadership, differentiation and focus strategies do not have any significant positive relationship with organizational performance.

H1 = Cost leadership, differentiation and focus strategies have significant positive relationship with organizational peformance

2.0 Literature Review

2.1 Defining strategy

The word strategy has several perspectives to it and therefore does not have a single definition. In its broad perspective, strategy can be considered as a coordinated plan or outline for making decisions and carrying out the activities of a firm, using available resources to create value and to achieve organizational goals, particularly in the long term. Mintzberg (1990) identifies five other perspectives within which strategy has been defined. Reference is made to Chandler (1962) who defines strategy as a plan of action which are taken to realize the long-term organizational goals. In another vein, strategy deals with the pólices and key management decisions which are are directed at exerting major impacts on an organization's finaical performance (Buzezell and Gale, 1997). In the words of Porter (1996), strategy is the process by which an organization can create a unique and valuable position by undertaking a set of activities that are different from those of of an organization's competitiors. Porter's position supports Miller and Friesen (1983) who have stated that for a strategy to be effective, it must be unique, rather than an imitation of what already exists.

2.2 Generic Competitive Strategies and SMEs in Ghana.

It is the considered view of Acquaah and Ardekani (2008) over 50% of Ghanaian firms employ cost leadership strategies in their operations. Cost leadership is a generic competitive strategy which, according to Porter (1985), is associated with the ability of an organization to become a low-cost producer to gain competitive advantage. From this perspective, it can be inferred that the actions taken by the majority of the SMEs are targeted at cost-reduction, such as expanded production to enjoy economies of scale, minizing cost of sales and controlling production and overhead costs, among others.

This notwithstanding, Acquaah and Ardekani (2008) further identified that some of the firms also relied on the use of differentiation strategy. Porter (1985) explains that differentiation strategy concentrates on the production of unique products by an organization. Amoako-Gyampah and Acquaah (2008) confirmed the use of differentiation by some organizations but also conceded that consumption patterns of Ghanaians over-rely on imported products, as oppossed to patronizing made-in-Ghana goods. For instance Uniliver Ghana has been successful in implementing product differenciation and vlauce focus of its product has succeded competitive position in the market in the minds of Ghanaain consumers by keeping value focus of the their products in lower income group become market leader in the manufactung industry in Ghana (Egu 2008).

This is in spite of the fact that the domestically manufactured goods may be of higher quality than the imported ones. The authours attribute this situation to the fact that Ghana is an emerging economy, and that, consumers prefer low-cost irrespective of the quality. This therefore makes the use of differentiation strategy somehow unprofitable (Amoako-Gyampah and Acquaah, 2008). This must definitely be a serious challenge to industry because if consumers prefer low cost, then the cost leadership strategy should suffice to meet the expectations of the consumers. However, the situation appears quite different because Ghanaians generally have a perception that any product imported into the country is of superior quality to a similar product produced locally (Kayanula and Quartey, 2000). Thus, even though the majority of the SMEs adopt cost leadership strategies, their peformance and growth are likely to be affected due to the inordinate taste of most Ghanaians for imported goods, in spite of the fact that most of the these foreign goods have questionable quality standards (Banai and Teng, 1996).


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The Effect of Business Strategy on Organizational Performance of Small-Medium Scale Enterprises in the Manufacturing Sector of Ghana
( Atlantic International University )  (Faculty of Business and Economics)
Business Management
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ISBN (Book)
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effect, business, strategy, organizational, performance, small-medium, scale, enterprises, manufacturing, sector, ghana
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John Parker Yanney (Author)Kofi Annan Dennis (Author)Godwin K. Awuah (Author), 2014, The Effect of Business Strategy on Organizational Performance of Small-Medium Scale Enterprises in the Manufacturing Sector of Ghana, Munich, GRIN Verlag,


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